Waste Cycle And Renewables Will Expand Operations Amid Uncertainties

Key Takeaways

• Strategic investments in CapEx and renewable energy suggest potential long-term revenue growth and improved margins.
  
• Strong cash flow and asset rotation strategy may enhance financial structure, focusing on efficiency and economies of scale.
  
• A2A faces significant risks from market volatility, regulatory changes, and competitive pressures, potentially impacting revenue stability and profitability.

Catalysts

Engages in the production, sale, and distribution of gas and electricity, and district heating in Italy and internationally.

• A2A is focusing on organic industrial growth with a significant increase in customer base and investment in CapEx, particularly in network sectors and new plants in the Waste cycle, which could boost future revenue.
  
• The company's strong cash flow generation and asset rotation strategy, including acquisitions and strategic partnerships, are enhancing its financial structure and may improve net margins.
  
• The issuance of a green hybrid bond to strengthen the equity structure indicates a proactive approach to financial sustainability, potentially impacting earnings positively by reducing financing costs.
  
• A2A's commitment to renewable energy growth, including acquiring significant photovoltaic capacity and increasing renewable energy production, suggests potential long-term revenue growth and margin improvement.
  
• The expansion of the customer base in the free market and strategic integration of newly acquired regulated networks show a focus on increasing operational scale, which could enhance earnings through increased efficiency and economies of scale.

A2A Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming A2A's revenue will decrease by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.8% today to 5.9% in 3 years time.
• Analysts expect earnings to reach €691.6 million (and earnings per share of €0.22) by about April 2028, down from €864.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, up from 7.7x today. This future PE is greater than the current PE for the GB Integrated Utilities industry at 11.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

A2A Future Earnings Per Share Growth

Risks

• A2A's market exposure, particularly in the energy generation, trading, and marketing segments, brings volatility risk despite efforts to implement hedging strategies, which might impact revenue stability and earnings.
  
• Competition from international operators is a potential risk in the waste collection market, which may affect market share and revenue in that segment.
  
• Changes in regulation or unsuccessful participation in tenders for waste management and other contracts could lead to reduced revenue and strained net margins.
  
• There is a dependency on favorable weather conditions, such as hydraulicity and renewables output, for strong performance in energy production; less favorable conditions could hinder revenue growth.
  
• Increased competitive pressure and margin compression in the retail energy market might limit profitability and affect net income growth.
  

Valuation

• The analysts have a consensus price target of €2.47 for A2A based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €11.7 billion, earnings will come to €691.6 million, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 8.5%.
• Given the current share price of €2.11, the analyst price target of €2.47 is 14.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.